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Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent

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  • Viral V. Acharya
  • Marco Pagano
  • Paolo Volpin

Abstract

We present a model in which managers are risk-averse and firms compete for scarce managerial talent (“alpha”). When managers are not mobile across firms, firms provide efficient compensation, which allows for learning about managerial talent and for insurance of low-quality managers. When instead managers can move across firms, firms cannot offer co-insurance among employees. In anticipation, risk-averse managers may churn across firms or undertake aggregate risks in order to delay the revelation of their true quality. The result is excessive risk-taking with pay for short-term performance and an accumulation of long-term risks. We conclude with a discussion of policies to address the inefficiency in compensation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18891.

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Date of creation: Mar 2013
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Handle: RePEc:nbr:nberwo:18891

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  1. Rüdiger FAHLENBRACH & René M. STULZ, . "Bank CEO Incentives and the Credit Crisis," Swiss Finance Institute Research Paper Series 09-27, Swiss Finance Institute.
  2. Bénabou, Roland & Tirole, Jean, 2012. "Bonus Culture: Competitive Pay, Screening and Multitasking," IDEI Working Papers 756, Institut d'Économie Industrielle (IDEI), Toulouse, revised Mar 2013.
  3. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
  4. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
  5. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
  6. Ing-Haw Cheng & Harrison Hong & Jose A. Scheinkman, 2010. "Yesterday's Heroes: Compensation and Creative Risk-Taking," NBER Working Papers 16176, National Bureau of Economic Research, Inc.
  7. Diego Comin & Sunil Mulani, 2006. "Diverging Trends in Aggregate and Firm Volatility," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 374-383, May.
  8. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.
  9. Daniel Gottlieb & Kent Smetters, 2011. "Grade Non-Disclosure," NBER Working Papers 17465, National Bureau of Economic Research, Inc.
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Cited by:
  1. Benabou, Roland & Tirole, Jean, 2013. "Bonus Culture: Competitive Pay, Screening, and Multitasking," IZA Discussion Papers 7321, Institute for the Study of Labor (IZA).

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